Cartoon of the Day: Stuck

About Everything: The Great Productivity Slowdown

In this complimentary edition of About Everything, Hedgeye Demography Sector Head Neil Howe explains why the much-debated productivity shortfall – amounting to $3 trillion – is "simply far too vast to pin on mismeasurement." Howe suggests, "It’s time to take the productivity slowdown seriously" and explains the broader implications for investors.

Gundlach vs. McCullough on Utilities | $XLU

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Clinton vs. Trump = Establishment vs. Insurgent?

Below is a brief excerpt from Hedgeye Potomac Chief Political Strategist JT Taylor's Morning Bullets sent to institutional clients each morning. For more information on how you can access our institutional research please email sales@hedgeye.com.

INSURGENT V. ESTABLISHMENT

We expect this election season to continue its unconventional trend far into the fall. Donald Trump's ascendancy has blurred the political lines - running to the left of Hillary Clinton on some issues and to the right on others. Now that John Kasich has dropped out and with Bernie Sanders mathematically eliminated, a Clinton v. Trump match up should not be viewed as a classic Democrat v. Republican race - instead there are strong undercurrents of an establishment v. insurgent clash with swaths of the electoral map and swing voters potentially in play.

We are already seeing evidence of Republicans "standing with her," but we also expect to see blue collar Sanders supporters giving Trump a look given his message on trade and national security.

CLINTON'S CONUNDRUM

Go back six or seven months and ask yourself if you ever thought you'd see the Republicans narrow their field of 17 candidates to one before the Democrat's field of three...This puts Hillary Clinton in the position of fighting a two-front war against Bernie Sanders on the left, and Trump for the most part, well, the right. This is not quite what she expected and planned for - especially now that Trump and the tattered Republican Party can regroup and concentrate exclusively on attacking her for the next six months.

It also forces Sanders to do some soul searching - although he is likely to do well in some upcoming states - will he continue to fight in a race where he is mathematically eliminated from winning and potentially damaging his party's chances in the general election?

WHAT WILL WARREN DO?

Democratic Senator Elizabeth Warren has been one of the most vocal proponents of the #neverTrump movement all the while sitting on the sidelines without endorsing a candidate. On the heels of the news of Trump becoming the presumptive nominee, Warren went on a Twitter tirade saying that she will "fight her heart out" to make sure Trump isn't elected. If she is going to have an impact where (and when) it's most needed, sources say she'll need to step up and endorse Clinton sooner than later quashing any support for Sanders and helping unify the Democratic Party against Trump.

Hedgeye Guest Contributor | Thornton: Will the Fed Raise Rates Before the Election?

Editor's Note: Below is a Hedgeye Guest Contributor research note written by Dr. Daniel Thornton. During his 33-year career at the St. Louis Fed, Thornton served as vice president and economic advisor. He currently runs D.L. Thornton Economics, an economic research consultancy.

A brief note on our contributor policy. While this column does not necessarily reflect the opinion of Hedgeye, suffice to say, more often than not we concur with our contributors. In the piece below, Thornton writes of current Fed policymakers, "I hope that the next president, whomever that may be, has the foresight to change the guard."

“Facts are stubborn things”

-John Adams

CNN Money posted this headline on April 27: Will the Fed raise rates before the elections?

The correct response, of course, is: Who cares?

The reality is that no one should because a 25 basis point move is irrelevant for economic activity. One would only care if one believes that raising the target for the funds rate is a signal that the Fed will shrink its balance sheet back to the point where bank excess reserves are once again trivial—about $2 billion. But, of course, the Fed is not poised to do that anytime soon. Instead, the Fed will continue to make tiny, 25 basis point, adjustments to its funds rate target.

More troubling, markets will continue to believe that the Fed (the European Central Bank, and other central banks) have considerable control over interest rates beyond the essentially meaningless federal funds rate. If this were not the case, CNN Money would never post such a headline.

As I pointed on in a previous Common Sense Economics Perspective, the Fed’s ability to affect interest rates stems, in part, from the fact that price discovery in the credit market is difficult. Hence, lenders are looking for an anchor for their lending rates. The belief that the Fed can control interest rates provides such an anchor. Indeed, this belief has allowed the Fed to control the federal funds rate very tightly simply by announcing its target for the rate—no actions were required.

I am sympathetic with my economist friends who find it difficult to believe that the Fed has been able to control the funds rate simply by announcing the target and, in so doing, has distorted interest rates on a variety of assets: Can the Fed have such power simply because market believes that it has it?

The evidence I have found elsewhere, plus the previously mentioned difficulty of price discovery in the credit market strongly suggests the answer is, yes! Specifically, I show that the Fed controlled the funds rate with open mouth operations, not open market operations, and that, in so doing, distorted Treasury yields along the yield curve out to five years.

Hence, I am not surprised that the Fed’s 7-year zero interest rate policy, and its quantitative easing, forward guidance, and Operation Twist policies have had even a larger detrimental effect on interest rates in the broader credit market. The distortion of interest rates is detrimental because it causes credit to be allocated differently than it would have been otherwise. Policymakers should interfere with the allocation of credit if, and only if, they can allocate credit better than the market can. I don’t believe that this is ever the case.

The bottom line is this: Any economist worthy of the name knows that the Fed can only have a significant effect on interest rates if the market believes that it can. Hence, interest rates could return to more normal levels if the Fed would simply admit that this is true. Of course, this cannot happen under current Fed leadership because it is too heavily invested in the policies of the last 7+-years.

This can only happen with a changing of the guard. I hope that the next president, whomever that may be, has the foresight to change the guard.

Initial Claims | Energy Is Still Bleeding

This morning's labor data shows two notable upticks. Seasonally adjusted initial claims rose +17k week over week to 274k, which is the largest week-over-week increase so far in 2016. Additionally, the first chart below shows that Challenger Job Cuts in the energy sector rose +155% in April to 20k after falling to 8k in March. Moreover, the ADP survey out Wednesday showed a weaker-than-expected +156k jobs added in April vs. consensus of 193k and the prior print of 194k (downwardly revised from 200k).

The Data

Prior to revision, initial jobless claims rose 17k to 274k from 257k WoW. The prior week's number was not revised. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 2k WoW to 258k.

The 4-week rolling average of NSA claims, another way of evaluating the data, was -6.9% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -8.2%

Yield Spreads

The 2-10 spread was unchanged WoW at 104 bps. 2Q16TD, the 2-10 spread is averaging 104 bps, which is lower by -4 bps relative to 1Q15.

Joshua Steiner, CFA

Jonathan Casteleyn, CFA, CMT

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